Market Update: Winter Provides the Perfect Storm – And It’s Not What You Think

Market analyst, Jeff McBee, talks about the impact of rest winter weather on the pallet market and its indications for the future given the lack of infrastructure in the sawmill industry to respond to looming shortages.

By Jeff McBeeDate Posted: 3/3/2014

This year’s winter season has been one that will be remembered by the hardwood industry for a long time. Saying that this winter’s weather is out of the ordinary would be a vast understatement. The brutally cold temperatures and snows that have reached to the panhandle of Florida makes this winter very unusual. The phrase “polar vortex” became a buzzword in the news media. One of the coldest arctic outbreaks in over twenty years immersed nearly every area east of the Rockies in bitterly cold temperatures that lasted weeks. Record low temperatures became the norm for almost all of January.

Snow and ice storms blanketed the East, dropping as far south as Texas and Florida. As of press-time, yet another winter storm with freezing rain and large snow totals swept across the Gulf States, swept northward, becoming a nor’easter that was accompanied by a harsh cold snap in the Northeast.

The deep-freeze weather conditions create big challenges for the entire forest products industry. Many sawmills and pallet operations have very little heat with some of the best forms of warmth being wood fired heat that cannot compete with this sort of weather.

The temperatures inside are difficult to deal with just on that level. But frozen lumber adds to the difficulties. Hydraulics are slow to get going. Air lines freeze. There is quite a bit of lost efficiency due to the cold.

Still, the largest factors impacting the market will linger long after weather warms. The perfect storm isn’t the weather. It is the market conditions created by a lack of forest products infrastructure that will present big challenges for the entire forest products industry until the market adjusts.

The forest products industry has lost a lot of loggers and sawmills since the economy tumbled in 2008. Both industries have offset the losses with gains in efficiency. Efficiency however can only take you so far. The surviving sawmills can add equipment, buy other mills for growth. The reduced logging force can only gain so much efficiency. That is where weather comes into play. Inclement weather has impacted logging greatly, and the industry’s ability to play catch up is limited at best.

The lack of forest products infrastructure has been a looming problem for quite a while, but the problematic conditions are magnified as the economy improves. The impact is far more pronounced in low-grade hardwood markets and how they affect the pallet industry.

The grade market has awakened. As on-grade material draws more money, mills send a larger portion of the log into those more profitable markets. Other, higher dollar industrial hardwood markets are vibrant. The rail tie industry is a nearly constant competitor for low-grade hardwood. That is certainly the case as the rail tie market continues to enjoy strong demand. The largest competitor in the current market has been oil exploration products.

Board-road, crane/dragline mats have been a hot market item. It is not unusual to see mat material bring nearly twice the money that pallet cants would sell for in the same market.

The combination of improving grade markets and soaring prices in oil exploration markets have driven stumpage prices higher and made mills less inclined to saw for pallet markets. The natural progression is that all hardwood pricing is trending upward, including pallet cants, boards and cut stock. The problem for the pallet industry is that these other industries have the ability to outspend the pallet industry and have proven many times that they are very willing to do so. These problems were seen on the horizon back in July when low-grade hardwood prices began to climb and contacts could not build any inventory, which is very unusual in the summer.

Contacts began to voice concerns about being able to have any sort of a winter inventory as a buffer against potential raw material interruptions that could come with winter weather. It’s not unusual for contacts to be concerned about building winter inventory, but it is highly unusual when that talk begins in July. It was the first time I had seen this in 22 years of tracking the market. Those concerns became fears. The fears became reality. And reality has become the train wreck that many could see coming during the summer.

There are some areas where pallet manufacturers are working with essentially hand-to-mouth supplies. The limitations in logging and milling only tighten supplies further.

Low-grade hardwood supplies were tight before the impact of the harshly cold weather took hold. The problems have been exacerbated by weather.

The biggest issue for the pallet industry can be tracked back to the market not creating additional material during the summer. As the housing market and economy continue to improve, the supply problems of industrial lumber – both hardwood and softwood – will grow worse, until the market finds a way to address the core issues.

There is an old saying of there never being a shortage of anything other than money. There is a lot of truth in that adage. A stronger housing market and a stronger economy will demand more wood from grade markets. Those markets will eventually be susceptible to the same infrastructure issues currently affecting low-grade hardwood markets.

Log, grade lumber and industrial wood markets will be forced to adjust (as markets always do). The pallet industry will have to adjust accordingly.

Low-grade hardwood prices have been climbing at a clip that the industry hasn’t seen since the early to mid-90s. Current market fundamentals point to more of the same on the horizon. It is hard to view the market under these conditions and not see higher industrial wood costs on the horizon.

The key for the pallet industry to be able to navigate the current rise in raw material pricing and any future moves is to stay informed and to ensure that customers are equally aware of the market’s moves.

Despite solidly steady pallet demand and rising raw material costs, the pallet industry was very hesitant to move pallet prices until recently. Pallet suppliers finally reached the point where there was no choice other than to push prices higher to offset higher raw material costs.

Customers – as always – are resistant to upward moves, but price resistance is pointless considering current conditions.

Editor’s Note: Jeff McBee is an analyst who researches and writes about the pallet industry and its raw material markets for Pallet Profile Weekly and the Recycle Record, the only newsletters dedicated to serving the pallet industry. For information on subscribing to Pallet Profile Weekly or the Recycle Record, call 800-805-0263 and ask for Jeff.)